Inflation Figures Help Rate Cutters

Inflation numbers are good for those who want a rate cut. The PCE deflator shows moderating inflation. U.S. futures--as well as European bourses--are also rallying because of President Bush's proposal to help homeowners who cannot pay their mortgages. Mr. Bush is proposing to raise the ceiling on the amount that a mortgage can be refinanced with federal insurance, and tax breaks for those whose mortgage debt is forgiven, among other proposals he will outline later this morning. Some can be done unilaterally by the preisdent, others would require action by Congress. Several Democrats already have bills floating in Congress.

Home builders like Beazer, Hovnanian, KB Home and Centex are all up 4%-7% this morning.

Traders are fully expecting a rate cut from the Fed, but the consensus is that Bernanke will not provide a direct tip of his hand this morning. The reasons are simple: there is a large amount of data coming between now and September 18th--traders feel the most important is the payroll report next week. A notable slowdown in job growth would be an important factor in the decision to cut rates.

Several traders noted that Bernanke almost certainly looked at yesterday's housing data from OFHEO, which was not nearly as bad as the Case-Shiller data released earlier in the week. Indeed, home prices were weak, but not plummeting. As Charles Cambpell at Miller Tabak noted, "Average prices across the nation increased at the slowest pace since 1994 in the second quarter, rising a meager 0.1% sequentially, the slowest sequential growth since Q4, 1994...this does not sound like data that, by itself, requires a monetary policy response."